How does an organization balance investments in R&D versus operational improvements? Start-ups may spend up to 20% of revenue on R&D, while mature organizations drop to single digits. This is an act of science and art, as one startup’s CEO spent heavily on sales and marketing since his previous startup lost the industry due to not spending enough…but that came at the expense of R&D. As Yogi Berra said, “Predicting is very hard, especially when about the future.”
There are rules of thumb to assist in the “invest, cut back, buy or exit” decisions, such as:
· You cannot build a business by cutting costs, as you must create to build revenue
· ERP implementation increases IT costs from 1.5% to 2% of Net Sales.
· Payback periods range from 2-4 years, depending on scale
· Empirical research shows that just half of acquiring companies create value for their own shareholders
The challenge is for the employees to know and understand the portfolio investment strategy. One company’s “double revenue in 5 years” strategy changed to “sustainable cost advantage” within a 3 year period…that keeps decisions/priorities uncertain.
How does your organization decide where to invest?
